nermil75

Hi everyone, I recently came here on a K-1 visa and should receive my employment authorization which I applied for along with my permanent residency in the next few weeks. I freelance and had a client who I'd been working with in the UK for a while that wants to continue to use me.

I still have my UK bank account and would need to invoice in Sterling and be paid into that bank account. My question is what is the best way to deal with what would be an ongoing and regular UK income if you are a US tax resident?

I'm wondering if I should set up a US company here or a UK ltd co and invoice that way or keep to being an individual (sole trader in the UK) and whatever the US equivalent is. Would I be paying UK tax or US tax? If I am a US tax payer with a UK client then who do I report to? And obviously from a tax perspective I'm not sure which would be better, ltd or LLC here or individual. Any ideas?

Anyone have any recommendations for an accountant that deals with UK expats in the US and the tax implications?

Michael

Your primary tax is paid to the US federal and state governments. All earned income is taxable by the US since you live and work in the US and if it also taxed in the UK, then it is your responsibility to get a refund from the UK based on tax treaties. Unearned income can possibly be taxed at the source (UK) and then foreign tax credits can be used to offset any US taxes owed.

Since you are an independent contractor, you have to pay self employment tax which is double the FICA tax (employee share and employer share) paid by an employee. Also normally you don't get benefits including paid holidays and vacations so that should be considered when determining your charges. However generally US tax law is generally pretty decent about writing off expenses where capital expenditures to a certain amount can be written off 100% in the year of purchase and you can depreciate part of your home that is exclusively used for business purposes only (use caution on that one since if it is shared business and pleasure, there could be problems) as well as write off a percentage of the costs of maintaining the home. I don't think you can setup the company as a UK company without having an on going operation in the UK since the company would normally be a subsidiary of that company registered in the US. If your spouse's employer is not covering you for medical insurance, decide whether a S corporation or a LLC many be better (one may possibly allow you to write off medical premiums as a business expense).

Whether you are paid in pounds or dollars to US or foreign banks accounts won't make any difference.

Nutmegger

Also you could factor in wire fees. As I don't want to bother keeping an eye on foreign exchange, I bill my European clients in dollars and have the money wired directly to my US bank account. With the agreement of the clients, I include in the bottom line of the bill what I will pay the bank for the pleasure of receiving my own money.

S Folinsky

However, the amount of the SE tax in lieu of what would be the employer's contribution, is a deductible expense. I forget if it is above the line or below the line.

srefre

You don't need to be resident in the UK to set up a Ltd company, so the OP could if they wished do this.

One possible reason this may make sense, is that they can then draw dividends from the companies profits. They would have to pay UK corporation tax, but they would avoid FICA tax as this does not apply to dividends.

Alternatively, they can draw all potential profits as salary. this wouldn't get round FICA, but no tax would be owed in the UK, as the company would make no profit, so no corporation tax would be due, and no income tax would be due, providing US taxes were paid.

Worth considering, depending on other factors in your scenario.

nermil75

Thanks everyone. A lot to take in. Based on the above if I do a UK ltd company, the Uk corporation taxes are relatively low. But the dividends I draw on, how would they be taxed in the US? How would I declare those on a US tax return? A a UK tax resident I would have to declare those dividends on a personal income tax (self assessment return) but according to someone I know who does this (he's a UK tax resident), he does not get taxed twice by HMRC. He pays his corp tax, declares his dividends but this gets netted off from the corporation tax he pays, so as those dividends are his only source of income he avoids having to pay more personal income tax on his self asessment. I'm just wondering however how this work for me on the US tax return?

My client won't invoice in dollars unfortunately. It sounds as though I want to avoid being self employed in the US based if its double FICA taxes. I dont' have a huge amount of expenses to declare to write things off. Its me and a computer. I don't think I'd be better off that way.

jeffreyhy

You're not paying double, you're paying 'the full freight'. Being self-employed you are both the employee and the employer, so you pay both the employee's share and the employer's share.

But, on your 1040, which determines the tax on your personal (the employee) income, you get to deduct the amount of the employer's share from your gross income, thus reducing your taxable income.

Regards, JEff

Michael

The tax regulations for an LTD that may be allowed in the UK may not be allowed in the US. In the US there are three types of limited liability companies, a LLC, S corporation, and a C Corporation. A LLC and a S corporations are primarily setup to limit a person's liability but profits are normally taxed as normal income. Although S corporations can pay dividends, since corporate tax was not paid prior to distributing the dividends, they are non qualified dividends and are taxed as normal income. Usually dividends can only be paid to passive investors and if paid to an non passive investor, it is considered as salary. The C corporation is the granddaddy of limited liability companies but has to pay corporate tax. However many tax benefits can be derived from a C corporation.

Since tax laws vary between the US and other countries, some form of a subsidiary has to be setup in the US to be incompliance with US tax laws and regulations. Typically a subsidiary is independent of the parent company and all income and expenses for that subsidiary determines the tax owed within the US. In other words, in most cases income earned in the US can't be assigned to the earnings of the parent company.

Sometimes (primarily with S corporations) tax avoidance schemes can be hatched by setting up SPVs or other vehicles in tax havens or moving profits to the parent company but most of those schemes are on the edge of the letter of the law and usually requires a multimillion tax accountant to pull it off.

If you are looking for a way to avoid or reduce taxes, you'll need to see a tax attorney to see if that is even possible without costing you an arm and leg.

Noorah101

My immigrant husband is self-employed and just a sole proprietor. He has no employees (he uses a couple of independent contractors sometimes). He doesn't have an LLC, S or C or anything set up. He's been running business this way for 9 years and never had any problems. However, he never receives income from outside the USA...not sure if that makes a difference or not. We have a CPA who handles our tax returns.

Rene

Michael

If you don't care about liability, then sole proprietorship is probably the way to go but if you have a LLC and get credit under the companies name and go out of business, your personal assets are protected. However being a LLC didn't help my son out much since he signed very few contracts under the company name. Everything else had to guaranteed by him since most companies won't give credit to small LLCs.

Another advantage of an LLC is that if you get sued, the LLC is normally sued and you usually can't be held liable except for gross negligence.

Bink

You can also have an LLC elected as an S corp (taxed as an S corp but still an LLC).
Whether you'd want to is a different matter though.

Michael is right, you'd probably be wise to seek advice on the best way forward to minimize tax exposure for your circumstances.

srefre

Ahh, my expertise is on the UK side, I didn't realise the US side would make it so difficult to be a foreign owner of a UK Ltd.

That said, and this is purely off the top of my head, without looking deeper into the matter, what is to stop the OP setting up a UK Ltd (either owned by himself, or trusted family), then the OPs client being a client of the UK Ltd, and the UK Ltd being a client of the OP?

That way the UK Ltd will not make any profit so will have no tax liable, and the OP will have no worries about liability, as they are not going to have repercussions from the UK Ltd, but will have the ease of being a sole proprietor.

I still second the advice above though, and would recommend you get advised from a tax professional experienced in foreign businesses\income.

Michael

I'm not quite sure what you are saying but how does that save him US taxes since he would still be liable for US taxes since he lives and works in the US. If you are indicating that somehow the money is made by the UK company, that isn't allowed by US tax laws and regulations. Some companies do setup a shell company but they better have a multimillion dollar lawyer working for them when the IRS comes after them.

Even senior executives of C corporations haven't figured a way of not paying individual income taxes in their country of primary residence. The tax benefits derived by C corporations are mostly at the corporate and benefits level through tax avoidance schemes. For example, a company may transfer ownership of patents to an Irish subsidiary and then all profits from those patents are taxed at the Irish corporate tax rate. C corporations can also provide certain benefits to all employees tax free that LLCs or S corporations may not be able to provide tax free. There are also other tax avoidance schemes for top executives such as the company paying for a party for an executive but is disguised as a business party or using the corporate jet for personal reasons but making sure there is a meeting with client during that trip.

C corporations also may possibly use SPVs or shell companies for tax avoidance purposes but many may possibly be on the very on the edge of the law.

Most western countries have similar tax laws but with variations in how a company can be setup and taxed within that country. Once the company has employee working in another country, they have follow the tax laws of companies for that country. If that wasn't the case, companies from around the world would setup shell companies in tax havens to totally avoid taxes.

srefre

I was purely thinking in terms of reducing liability whilst still being a sole proprietor - as the only client would be the UK Ltd, you'd be at no risk of getting sued or similar and losing personal assets.
Really just a layer between the OP and his client, in case things got nasty.

As for reducing US tax liability, with the IRS being much more pervasive than HMRC, a consultation with an expert is required.

Michael

Even that may not be possible since US courts may not recognize Ltds. Although there are plenty of Ltds in the US, they are subsidiaries setup under use corporate law. The can call themselves anything they want including Ltd but in effect they are subsidiaries setup like US corporations.

Setting up a LLC or a S corporation is pretty expensive and simple.